Page 11 - The Impact of the 2018 Trade War on U.S. Prices and Welfare

5. Estimating Price and Welfare Losses

The critical question for short-run impacts, then, is whether the price received by foreign

∗
exporters, , falls in response to a tariff or not. A necessary condition for the U.S. to gain from
.
these tariffs in the classical model is that foreign exporters absorb some of the tariff costs so that

they are not fully born by home consumers (Figure 5 versus Figure 6). Thus, understanding how

the price received by foreign exporters moves in response to a tariff increase is a first key step in

understanding the welfare implications. We examine these effects by regressing the change in the

log import unit value (measured without including the tariff change) over a twelve-month period

∗
∗
(i.e., ln( / '-./ ) on the change in one plus the applied tariff on imports (i.e., ln[(1 + )/(1 +
'
'
'-./ )]) over the same period. Treating the Trump administration’s tariffs as exogenous, and
assuming that they are uncorrelated with unobserved shocks to unit values, the estimated

coefficient in this regression captures the impact of the tariffs on the prices received by foreign

exporters.

Column (1) of Table 1 shows the results from this regression. We obtain an estimate of tariffs

on unit values of -0.003, which suggests that the tariff changes have had little-to-no impact on the

prices received by foreign exporters. Moreover, because the standard error of this estimate is 0.024,

the coefficient is precisely estimated, so we can reject the hypothesis that there is a substantial

impact of tariffs on exporter prices. This finding that the Trump administration’s tariff changes

have been almost entirely passed through into domestic prices, leaving exporter prices unchanged,

is consistent with the findings from a different estimation methodology in Fajgelbaum, Goldberg,

Kennedy and Khandelwal (2018). Thus, it appears that the supply elasticity of exports, at least in
3

3 While much of the existing literature on the passthrough of cost shocks into prices focuses on exchange rate
shocks (e.g. Amiti, Itskhoki, and Konings (2014)), Khandelwal, De Loecker, Goldberg and Pavcnik (2016) examine
the effect of lower tariffs in India, while Edmond, Midrigan and Xu (2015) consider the effects using Taiwanese

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